Handbook of Competition in Banking and Finance
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Handbook of Competition in Banking and Finance

Edited by Jacob A. Bikker and Laura Spierdijk

For academics, regulators and policymaker alike, it is crucial to measure financial sector competition by means of reliable, well-established methods. However, this is easier said than done. The goal of this Handbook is to provide a collection of state-of-the-art chapters to address this issue. The book consists of four parts, the first of which discusses the characteristics of various measures of financial sector competition. The second part includes several empirical studies on the level of, and trends in, competition across countries. The third part deals with the spillovers of market power to other sectors and the economy as a whole. Finally, the fourth part considers competition in banking submarkets and subsectors.
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Chapter 3: Adapting conjectural variations methods to banking competition

Bastiaan Overvest


Most economists agree that effective banking competition contributes to affordable and innovative banking services. More controversial is how to measure banking competition. A frequently used approach is the conduct parameter (or conjectural variations) method. Applications of this method make no structural distinction between financial products and non-financial products. Yet financial products such as mortgages, consumer loans and SME loans are quite different from non-financial products – an interest rate is not “the” price of a loan. The chapter adjusts the conjectural variations model to a net present value setting to explicitly take characteristics of financial products into account. It shows that the adjusted method tends to yield lower estimates of the degree of competition than the standard static non-financial method. The question of how to reliably measure banking competition remains open.

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